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Real to split off Rhapsody as separate company

updated 05:30 pm EST, Tue February 9, 2010

Rhapsody to be pure music firm

RealNetworks in a surprise move tonight broke off Rhapsody as a separate company. The move has the blessing of Real's partner in the venture, Viacom, and will transfer all the rights to Rhapsody so that its streaming and download music services remain intact. Real will also inject $18 million in cash and promises that Rhapsody will be independent, with no one else holding a majority stake.

Real will however use the exchange of money to buy radio services out of Rhapsody, the company added. Viacom's MTV Networks also promised to spend $33 million on advertising Rhapsody.

In explaining the split, Real's acting chief Robert Kimball made no secret of wanting to offload Rhapsody as a perceived financial problem for its newly separated parent. It instead wants to focus primarily on its core services, such as RealPlayer, RealArcade and its mobile business.

"Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company," Kimball said.

The move, while spun as creating a "pure" music company, reflects Real's long-term frustration with the lack of success with its service. Although it provides more than 1 billion downloads or streams per year, its primarily subscription-based service has never grown to be large enough to challenge newer rivals. It was one of the first serious all-digital music services, begun in 2001, but was quickly eclipsed by the iTunes Store two years later as customers chose pay-per-track over subscriptions. Real tried responding by offering downloads and even going so far as to implement a DRM system known as Harmony that would convert then-locked Rhapsody files into FairPlay-protected AAC that would play on an iPod. Apple eventually blocked Harmony under legal pressure and only regained some compatibility when Rhapsody switched to MP3s for permanent purchases.

The newly unassociated Real faces pressures of its own, as RealPlayer has often been replaced on the web by Flash and is now mostly useful to convert video to iPhone- and iPod-friendly formats. Its attempt to promote importing DVDs has also fallen short courtesy of an MPAA-backed lawsuit that has resulted in a temporary ban on sales that could become permanent.


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